Eric Holder’s Missing Defendants

On Monday, Eric Holder, the Attorney General, announced that Citigroup had agreed to pay seven billion dollars to settle a federal investigation into its packaging and marketing of mortgage-backed securities in the run-up to the 2008 financial crisis. The penalties Citi accepted—four and a half billion dollars in fines and two and half billion dollars in restitution to homeowners and other injured parties—were the largest yet to be paid to Justice Department in a civil case, a point Holder stressed. (J.P. Morgan paid thirteen billion, but that was a global settlement covering claims from a number of government entities.)

“This historic penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi,” he said in a Justice Department news release. “The bank’s activities contributed mightily to the financial crisis that devastated our economy in 2008.”

Since Citi was a relatively minor player in the sub-prime mortgage market, financial historians may quibble with that latter judgement. But the evidence that the government uncovered during a lengthy investigation justified Holder’s first assertion. And, in doing so, it provided a worrying answer to one of the enduring questions from the great boom that preceded the great blow up: Did the bankers on Wall Street know that they were peddling junk that was likely to explode in the hands of the buyers, or had they, too, fallen victim to the wishful thinking and delusional self-rationalization that typifies bubbles?

In the case of Citigroup, it appears that at least some of the bankers knew perfectly well what game they were engaged in, which was buying thousands of dubious home loans, cobbling them together, and repackaging them as investment-grade mortgage-backed securities. They were made aware that they were selling offal, but they went ahead and marketed it as prime steak. On Wall Street, such an activity is generally called a securities fraud.

At Citi, as at other firms, the manufacture and sale of mortgage securities wasn’t wholly unconstrained by normal business rules. As part of the due diligence that is legally required to sell investment-grade securities, Citi asked specialized research firms to sample some of the loans it had bought from fast-growing mortgage issuers such as Ameriquest, Countrywide Financial, and New Century, and make sure that the folks who had taken out the loans were capable of repaying them. But when the due diligence reports came back, they were hardly reassuring. As Holder explained, “on a number of occasions, Citigroup employees learned that significant percentages of the mortgage loans reviewed in due diligence had material defects.”

In some of the instances detailed by the Justice Department’s statement of fact, the proportion of dubious loans in a given mortgage pool went as high as thirty or forty per cent. That is what the firms who did the sampling told Citi, anyway. On reading one of the due-diligence reports, a trader at the bank wrote in an internal e-mail, “We should start praying…. I would not be surprised if half of these loans went down…. It’s amazing that some of these loans were closed at all.”

In this case, and in many others, the bank went ahead and securitized loans from the pool whose quality had been called into question. The mortgage-backed securities that Citi created were sold for billions of dollars, and all too many of them subsequently endured heavy losses as individual home owners defaulted on their loans—just as the Citi trader had predicted they would.

Where is that trader today? Where is his boss, and his boss’s boss, and his boss’s boss’s boss? About the only thing we know is that they aren’t in the dock. Nobody is, unless, of course, you follow the example of the Supreme Court and ascribe some sort of full-blown personhood to a corporation, in this case Citigroup. “Today, we hold Citi accountable for its contributing role in creating the financial crisis,” Associate Attorney General Tony West said, “not only by demanding the largest civil penalty in history, but also by requiring innovative consumer relief that will help rectify the harm caused by Citi’s conduct.”

Ahem. The best possible spin on the settlement is that it represents a belated but promising step-up in the effort to hold some individual bankers accountable. Holder insisted that nothing in it precludes the bringing of criminal charges. Perhaps the inter-agency group of investigators and prosecutors that brought this civil case will now press ahead and use the evidence they uncovered to go after the traders and supervisors who were responsible for the “wrongdoing,” and the senior bank executives to whom they reported.

Perhaps. But the precedents are not encouraging. In the past few years, we have seen a series of cases in which the banks agree to pay for their misconduct—or, rather, they agree that their shareholders will pay for their misconduct—but none of their employees, senior officers, or directors are brought to book. This method of crime-fighting holds promise. If it was extended to drug cartels or the mafia, we could forego the messy and dangerous business of bringing hitmen, capos, and mob bosses to trial, in favor of reaching lucrative settlements with the organizations they work for.

“Today, we hold the Sinaloa drug cartel accountable for its contributing role in creating the heroin crisis,” a future associate attorney general might well say, “not only by demanding the biggest civil penalty ever imposed on a criminal organization, but also by requiring the Mexican drug traffickers to finance innovative treatment programs that will help rectify the harm they have caused.”

O.K., I am laying into on bit thick. But so, too, is Holder. Before he leaves office, a moment that might not be too far away, according to a recent Politico profile, he surely would like to demonstrate that there isn’t one law for people on Wall Street and one law for everybody else. He won’t be able to do that by imposing more big fines on other banks—Bank of America is reputed to be next in line—while treating the individuals who carried out the wrongdoing and benefited from it as mere shadows. In fact, sticking with this approach will only strengthen the opposite impression: that Wall Street still has Holder’s number.

Photograph by Andrew Harrer/Bloomberg via Getty.

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